I wrote in a recent post about how poor people are fundamentally different to non-poor people in the way they use money, and in their approach to risk. In that post, I took a dim view of a government proposal to provide financial products to the community. This reminded me of my long-running, but somewhat dormant fascination with microfinance and financial inclusion generally.
I never actually worked in the field, but there was a pretty long period in my 20s when I hung out a lot with a whole lot of really poor people on a regular basis, the end of which coincided with a lot of time spent reading David Roodman’s Open Book blog*. Over this period, I thought about poverty, cashflows and the way poor people use their money a lot, and I came up with three necessary, but not sufficient conditions for the success of a microfinance, or financial inclusion project, startup or other initiative.
For your microfinance or financial inclusion initiative to succeed, it must:
- Create value
- Be understood, and
- Be trusted.
In the rest of the post, I’ll explain what I mean by each.
For a product to create value for a poor person it must meet a need. It might let them smooth out their earnings, let them borrow more cheaply than from the local loan shark, help them retain their savings, help them transfer money to family members cheaply and transparently, give them payouts when they experience income shocks/illnesses/accidents, or anything like that.
So, if your initiative doesn’t solve a problem they actually have (rather than one you think they have**) better than some existing solution they have (or better than doing nothing), then you’d better go back to the drawing board.
If you want poor people to sign up to your initiative, they will have to understand it, and that’s not easy when you’re talking about money and uncertainty. People are really bad at understanding risk and acting on it, and there's recent evidence that poverty makes people even worse at particular kinds of tasks.
If you’re talking about a financial inclusion project, then almost by definition, the people will have little experience with and understanding of the financial system. Just because you ran the numbers and found that poor rice farmers could benefit by purchasing micro-rice-price-hedges doesn’t mean you can explain it to them in terms they can understand.
Poor people are very risk averse in financial decisions. They need to be, otherwise they’ll run the risk of running out of money and having to sell off some asset, get kicked out of their home, or something like that.
Poor people are also disproportionately located in poor countries, and poor countries usually have poor public institutions, and few, if any, consumer protections for people screwed by unscrupulous actors. And, what minimal protections exist, are usually not available to poor people who haven’t got the time or money it takes to pursue remedies that might be available to them. As a result, they have a low level of trust in government and private companies.
As an example of this, a new paper by Bold, Kaizzi, Svensson, and Yanagizawa-Drott (which I saw on Chris Blattman’s blog) describes an experiment where seed and fertiliser sold to farmers in Uganda was tested to see if it was as advertised. They found that 30-50% of the inputs sold to farmers were either counterfeit or adulterated. In a place like Uganda, farmers typically don’t have access to testing facilities, and even if they did, there aren’t the consumer protections for them to seek remedies. In this context, they just shrug their shoulders, and don’t use the inputs, leading to lower productivity.
When you turn up with your bleeding-heart idea to help the poor people help themselves, it’s not immediately clear to them whether or not you actually plan on helping them, or if you’re just one more in a long line of scammers trying to bilk them out of their hard-earned savings.
So, if you can meet these three criteria, you’ll be on your way to a successful microfinance or financial inclusion project. Good luck.
*Which resulted in his book, Due Diligence: An Impertinent Inquiry into Microfinance, which everyone interested in this field should read.
**This is relevant too.